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2011 (11) TMI 509 - AT - Income TaxLoss on foreign exchange rate fluctuation - remittance of research and know-how fee to the foreign collaborator - Non deduction of TDS - disallowance u/s 40(a)(i) - Held that In present case, it is evident that the assessee was required to deduct tax at source on said transaction and it deducted requisite tax at source as per section 195(1) at the time when such income was credited to the account of the foreign concern. Consequently, it would follow that when such income is actually paid by the assessee to the foreign concern, the same would not again invite the deduction of tax at source as per section 195(1). As per the assessee, out of the total claim of Rs. 42,89,872/- as fourth instalment of research and know-how fee in this year, tax has been deducted in relation to a sum of Rs. 34,07,638/- and, therefore, it is merely a case involving short deduction of tax at source and not a case for failure to deduct tax at source. Thus as decided in DCIT - 11(2) Versus Chandabhoy & Jassobhoy Chandabhoy & Jassobhoy, (2011 (7) TMI 956 - ITAT MUMBAI) the disallowance envisaged in section 40(a)(ia) can be invoked only in the event of non-deduction of tax, but not in cases involving short deduction of tax at source - Decided in favor of assessee. Provision for doubtful debts - Dis-allowance being contingent liability - Held that - Though the claim of the assessee is under head provision for doubtful debts , in actuality the claim is based on certain deductions claimed to be made by the Government buyers as liquidated damages for late supply of goods, etc. CIT (A) in his order has referred to two journal entries in this regard and on that basis directed the AO to allow the claim, subject to the verification that the liability crystallized in this year or not but AO in his order has not carried out the directions of the CIT (A) in its proper perspective & has merely gone by the fact that the claim has been made under provision for doubtful debts - matter restored to the file of the AO with directions to consider the true nature of the claim - in favor of the assessee by way of remand. Excise duty payment on finished goods not included in the value of closing stock - CIT deleted the addition - As similar issue has been adjudicated by the Tribunal in favour of the assessee thus following the precedent the decision of the CIT (Appeals) deleting the addition on account of Excise Duty payable on finished goods not included in the valuation of closing stock is hereby affirmed - Decided in favor of assessee. Netting of interest received from interest paid to Department - Held that - As assessee is assessable in respect of the gross interest received from the Income-tax Department and not merely on the net interest remaining after set off of interest paid to the Department the interest payment has also not been held to be deductible from interest received in order to arrive at the assessable income - Decided against the assessee.
Issues Involved:
1. Disallowance of Rs. 8,82,234/- due to foreign exchange rate fluctuation under section 40(a)(i) of the Income-tax Act. 2. Disallowance of Rs. 6,11,000/- as a provision for doubtful debts. 3. Addition of Rs. 1,99,43,610/- on account of excise duty payment on finished goods not included in the value of closing stock. 4. Taxation of net interest received from the Income-tax Department. Issue-wise Detailed Analysis: 1. Disallowance of Rs. 8,82,234/- due to Foreign Exchange Rate Fluctuation: The assessee appealed against the disallowance of Rs. 8,82,234/- on account of foreign exchange rate fluctuation loss related to the fourth installment of research and know-how fee remitted to its foreign collaborator. The Assessing Officer (AO) disallowed this amount, invoking section 40(a)(i) of the Income-tax Act, stating that no tax was deducted at source for this additional sum. The Commissioner of Income-tax (Appeals) upheld the AO's decision. The assessee contended that the fluctuation loss did not form part of the technical fee and thus did not require TDS under section 195(1). Alternatively, even if it did, the disallowance under section 40(a)(i) was not warranted for short deduction of tax, citing Tribunal decisions in similar contexts. The Tribunal agreed with the assessee, stating that section 195(1) did not require TDS at both credit and payment stages and that the loss on foreign exchange was not additional income but merely an increased cost of remittance. Thus, the disallowance under section 40(a)(i) was not justified, and the appeal on this issue was allowed. 2. Disallowance of Rs. 6,11,000/- as a Provision for Doubtful Debts: The AO disallowed Rs. 6,11,000/- treating it as a contingent liability. The Commissioner of Income-tax (Appeals) directed the AO to allow the deduction subject to verification that the liability crystallized in the relevant year. The AO, however, sustained the disallowance, stating it was a provision for doubtful debts not written off during the year. The Tribunal noted that the AO did not properly follow the Commissioner's direction to verify the crystallization of the liability. The Tribunal restored the matter to the AO to verify the nature of the claim as liquidated damages for late supply of goods and to allow the deduction if the liability had indeed crystallized during the year, thus allowing the appeal for statistical purposes. 3. Addition of Rs. 1,99,43,610/- on Account of Excise Duty Payment: The AO added Rs. 1,99,43,610/- to the closing stock valuation due to excise duty payable on finished goods. The Commissioner of Income-tax (Appeals) deleted this addition, referencing similar decisions in the assessee's favor for previous years. The Tribunal affirmed this decision, noting that the issue had been adjudicated in favor of the assessee for the assessment year 1992-93 by the Tribunal, thus rejecting the Revenue's appeal on this ground. 4. Taxation of Net Interest Received from the Income-tax Department: The AO taxed the gross interest received from the Income-tax Department without allowing for the interest paid by the assessee to the Department. The Commissioner of Income-tax (Appeals) allowed the assessee's plea to tax only the net interest. However, the Tribunal reversed this decision, referencing its earlier ruling for the assessment year 1992-93, which held that the assessee should be taxed on the gross interest received. Thus, the Revenue's appeal on this ground was allowed, and the AO's decision was restored. Conclusion: - The appeal concerning the disallowance of Rs. 8,82,234/- was allowed, and the addition was deleted. - The issue of Rs. 6,11,000/- was remanded back to the AO for proper verification. - The addition of Rs. 1,99,43,610/- was deleted, upholding the Commissioner's decision. - The decision to tax the gross interest received was upheld, reversing the Commissioner's decision. Cross Objection: The assessee's cross objection related to the Rs. 8,82,234/- issue was dismissed as it was rendered academic following the decision in the main appeal. Final Result: - The assessee's appeal was partly allowed. - The Revenue's appeal was partly allowed. - The assessee's cross objection was dismissed.
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